2-Tier ERP: Subsidiary as a production unit and internal supplier to Head Quarters

In this blog, let’s understand how a subsidiary can operate as a Production Unit to Headquarter with 2-tier deployment model by integrating S/4HANA Cloud with S/4HANA(OP)/ECC/any ERP

Introduction

Many Global Organizations are increasingly considering a two-tier ERP strategy to run two integrated ERP systems simultaneously. In a two-tier ERP deployment model, organizations keep their existing Tier-1 ERP system at the Headquarter level with global standard processes while allowing divisions/business units/subsidiaries to select a second ERP system to support specific needs and local legal requirements.

Benefits:

Comprehensive functionality, global requirements

Reduced cost, improved innovation, greater agility

Better operational control

Here we are going to see how 2 tier approach can be leveraged for manufacturing scenario.

For example, a subsidiary production unit which runs on S/4HANA Cloud receives demands (material request) from Headquarter which runs on S/4HANA on premise/ECC or any other ERP solutions and supply goods to them.

In this scope item headquarter sends material request to subsidiary and in turn subsidiary will produce the material and deliver the material to the headquarter.

As a prerequisite, there should be master data synchronization between subsidiary and headquarters. Usually master data will be created in headquarter and shared across subsidiaries.

Let us understand the process flow in detail,

Process Flow

Required mandatory master data like material master will be created in Headquarter and sent to subsidiary. As subsidiary acting as individual production unit, other master data like work center, bill of materials, routing can be created directly in the subsidiary.

If Headquarter and Subsidiary have different master data, then we have option to maintain master data mapping in the SAP Cloud Platform (SCP) which may require some minimum development effort.

In Headquarter (HQ), based on the production planning process (MTS/MTO), MRP Run will be carried out and planned orders will be generated. As parts are produced in the subsidiary planned orders are converted to purchase requisition at HQ. On approval, purchase requisition will be converted to purchase order with Vendor as Subsidiary. (PR/PO approval is optional process)

Once purchase order is created and released in headquarter a corresponding sales order will be created at the subsidiary automatically. Subsidiary will run the MRP to fulfill the demands generated by the sales order from Headquarter. MRP Run will generate planned orders at Subsidiary for the parts. These plan orders will be converted in to production order.

Production order will be released and missing parts will be procured by the Subsidiary directly if required. Subsidiary will carry out the Production in S/4HANA Cloud and confirm the produced quantities along with scrap if there is any. Finally, goods receipt will be posted against the production order.

On the production process at Subsidiary, the Headquarter will get the visibility on Production bookings for the day, Raw Material stocks at Subsidiary, finish good stock at Subsidiary, amount of Rejection or Scrap generated during production process. This will help HQ to understand how Subsidiary is carrying out Production process, what are the inventory levels which in turn will help HQ to take strategic decisions for e.g. Planning and on Inventory carrying cost.

Once the stocks are available at Subsidiary from Production process, Warehouse person at Subsidiary will create the outbound delivery against the sales order with Customer as HQ and goods will be issued. An Advance Shipping notification will be sent to headquarter automatically. Finally billing document will be generated and an invoice will be sent to headquarter for payment automatically.

Headquarter will receive the advance shipping notification (Inbound delivery) which might be helpful for their planning, and will post goods receipt against the inbound delivery once physically goods are received from the Subsidiary. Subsidiary invoice will be verified and subsequently the payment will be released for Subsidiary. In 2 Tier mode, the Subsidiary will get the information on receipt of materials and payments which are released for them.

Now with this 2 tier approach we have completely integrated end to end process with certain amount of automation which leads to error free process between headquarter and subsidiary.

As Headquarter and subsidiary are inter connected, headquarter will have much visibility on subsidiary stock availability, production stages, production rejection, production variance etc., which help them to plan their production planning and deliver Finish goods to customer more efficiently.

By using the 2 tier approach of SAP, Organization can use the integration approach provided by SAP to connect with their subsidiaries running on S/4HANA Cloud and get the required information on the manufacturing process of subsidiaries with high visibility and operation controls, thus making the Integrated manufacturing more efficient.

Stay tuned to for the next blog in this series.

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